In the years since 2001, when CSRC published the CSRC Independent Director Opinion, the most notable criticism of independent directors in China has centered on their independence—or, more appropriately, their lack of independence—from controlling shareholders and other corporate insiders.130 Since most nominations of independent directors still lie in the hands of boards controlled by dominant shareholders under the current corporate-ownership structure, most independent directors are beholden to dominant shareholders.131 In a survey by the Listed Companies Association of Shanghai, 55% of independent directors were nominated by major shareholders and 27% by corporate executives. Since major shareholders have controlled most corporate executives in recent years, we can calculate that major shareholders have nominated
127See China Securities Regulatory Commission, ShangshiGongsiZhiliZhunze
[Principles of Corporate Governance for Listed Companies],ch. 5, issued Jan. 7, 2002. See also China Securities Regulatory Commission, GuanyuJiaqiangShehuiGongzhongguGudongQuanyiBaozhang de Ruogan Guiding [Several Provisions for Enhancing the Protection of Investors’ Rights], art. 2, issued Dec. 7, 2004.
128 See China Company Law, supranote126, art. 123.
129 Article 123 of the China Company Law stipulates only that listed companies should have independent directors and that the State Council should promulgate relevant rules.
130 In the prevailing practice, controlling shareholders appoint their social friends to independent-director positions.
Xi, supra note2, at 17-18.
131See CSRCIndependent Director Opinion, supra note 126, § 4(1): “A listed company’s board of directors, supervisory board and shareholders who individually or together hold not less than 1% of the shares in the listed company may nominate candidates for Independent Director. Such directors will be decided through election by the shareholders’ general meeting.”
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over 80% of independent directors during this same timeframe.132 With the largest major shareholder in Chinese capital markets being the state, “China’s corporate governance regime can never wholeheartedly sanction a system in which independent directors can obstruct the wishes of dominant shareholders.”133
Commentators have coined the term ‘renqing dongshi’ (roughly translated as “favor directors”) in referring to independent directors who join a board simply because of their close personal relationships with corporate insiders, and have coined another term,‘huaping dongshi’
(roughly translated as “vase directors”) in referring to independent directors whose function is no more than window-dressing.134 The popularity of these two terms reflects not only the ineffectiveness of Chinese independent directors but also public concerns over social ties among independent directors and corporate insiders.
Culture has also helped reinforce the social ties among independent directors and controlling shareholders or corporate insiders. Guanxi and renqing (favor) are core concepts and practical principles in Chinese social relationships. Guanxi is more close to the concept of social ties or personal relationships.135 On the other hand, the concept of renqing operates more like the rules of guanxi, such as how you should treat someone you know.136 The rule of renqing actually
132ChaobinXie, JiegouyuQianhe [Deconstruction and Embeddedness] 185 (2006).
133 Clarke, supra note 2, at 215.
134Tan, supra note 72, at 19. “Vase directors” is a term first famously used by Jiahao Chen, the independent director of ZhengbaiwenCorporation, which was accused and penalized by the CSRC for misrepresentation and violation of GAAP rules in 2001. Jiahao Chen characterized himself as a “vase director” to defend himself from possible penalties levied by the CSRC. XINRONG GUAN,DULIDONGSHIZHIDUYUGONGSIZHILI:FALI HE SHIJIAN [INDEPENDENT DIRECTOR SYSTEM AND CORPORATE GOVERNANCE:THEORY AND PRACTICE] 321 (2004).
135 “The term ‘relations’ has a special meaning in Chinese. It connotes the meaning of ‘relationship’ in the sense of a long-term relationship with a friend or acquaintance, but it also connotes the meaning of ‘connection’, in the sense of being socially or politically well connected. It is not always used in a pejorative sense, but often has an
instrumental, if not a sleazy, flavor. The word is often used when Person A does something that might be impossible without the help of Person B, with whom Person A has relations. Relations play a crucial role in all aspects of
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operates beyond the rule of reciprocity and it can be manifested in an old Chinese saying, “If you have received a drop of beneficence from other people, you should return to them a fountain of beneficence.”137
If we understand that a component of traditional and contemporary Chinese culture is the belief that one favor deserves another—and perhaps even better—favor, then we can see that the term ‘renqing dongshi’ (favor directors) refers to those independent directors who join a board because they owe controlling shareholders or corporate insiders a favor and they return those corporate insiders a favor by being nominally independent directors. In this situation, we cannot expect these “favor directors” to act with impartiality in the best interests of the corporation. It was reported in 2011 that China’s top 50 listed companies collectively employed a total of 34 independent directors who were retired government officials. By retaining former government officials, these enterprises want not only to take advantage of these government officials’ guanxi in the public sector, but also to use the independent-director position as a kind of gift, presented to these retired officials as a renqing (i.e., a favor); that is, as a way of thanking the retirees for various benefits they might have bestowed on the given enterprise during their time in elected or appointed office.138
Ping Jiang, a well-known law professor and former President of China University of Political Science and Law, once said in a conference that, from his practical experience of serving as an independent director in various posts, independent directors in China are basically window-dressing. He also confessed that the corporate insiders who invited him to serve as an
49AM.J.COMP.L. 249, 319-329 (2001).
137The old Chinese saying is “DishuiZhien Dang YongquanXiangbao.”
138Ruizhuo Sun, TuixiuGaoguanrenDudongYingdangYanjin [Retired Government Officials Should Be Prohibited from Being Independent Directors], SHENZHEN ECONOMIC DAILYA12 (July 7, 2011), available at
http://szsb.sznews.com/html/2011-07/07/content_1648933.htm (last visited Sept. 24, 2012).
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independent director had all been his close friends basically asking him to do them a “favor.”
As far as I see it, independent directors in the companies where I participated are no more than a “vase” or “decoration.” The CSRC has made the independent-director system mandatory, and I think boards in general truly don’t want independent directors. Personally, the people who invited me to serve as an independent director were all close friends asking me to do them a favor. We’re close, so I wouldn’t turn my back on them.[139]
It is commonplace for independent directors in China to have close personal relationships with controlling shareholders or corporate insiders.140 With boards dominated and controlled by insiders (the so-called “insider-control problem”), the given corporate environment seems not to encourage truly independent directors.141 Reported interviews from China have yielded findings similar to those stemming from Taiwan: companies there have tended to hire independent directors who have guanxi with controlling shareholders or corporate insiders and who would not vote against controlling shareholders.
How do boards choose [independent directors]? Corporate insiders want someone who has been working well with them. And board members wouldn’t
139 Ping Jiang, Weiguo Wang, and Xudong Zhao, DuliDongshiSanrentan [A Talk on Independent Directors by Three Masters], GaofengDuihua in FadaMingshangJingjiFalu Wang [Top Dialogues in CCELaws] (Feb. 26, 2004), available at http://article.chinalawinfo.com/Article_Detail.asp?ArticleId=28364.
140Jianchuan Lee, A Research on the Independent Director System — From Bilateral Perspective of Jurisprudence and Management290-292 (2004).
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